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Tech ETFs to Watch Post Apple's Mixed Bag Q4

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The technology giant Apple Inc. (AAPL - Free Report) failed to cheer investors after reporting fiscal fourth-quarter 2016 results after the closing bell yesterday. Though the company surpassed our earnings and revenue estimates, iPhone sales declined for the third consecutive quarter. In addition, Apple guides lower profit margin for the upcoming holiday quarter despite projecting record revenue (read: Should You Buy Apple ETFs Before Its Earnings?).

Apple recorded its first annual revenue and profit decline in 15 years. This further weakened investors’ confidence in the growth prospects of the company, already rattled by the saturation in the smartphone market. However, the company expects a return to growth in the ongoing quarter on strong demand for iPhone 7.

Apple Q4 Results in Focus

Earnings per share came in at $1.67, a penny ahead of the Zacks Consensus Estimate and down from the year-ago earnings of $1.96. Revenues declined 9% year over year to $46.85 billion but beat our estimate of $46.83 billion. Notably, revenue in China, including Hong Kong and Taiwan, plunged 30% year over year to $8.8 billion (read: China ETF Winners One Year Post-Selloff).

Apple sold 45.51 million iPhones in the fiscal fourth quarter, down 5% year over year, resulting in total revenue of $28.16 billion. This represents a 13% drop in revenue from the year-ago quarter and accounted for 60% of total revenue. Meanwhile, unit sales for Mac desktop computers and iPad declined 14% and 16% year over year, respectively.  

Solid Outlook

The ubiquitous gadget-maker foresees revenues in the range of $76–$78 billion for the current holiday quarter. The lower end is much higher the current Zacks Consensus Estimate of $73.5 billion and the year-ago record revenue of $75.8 billion, which is traditionally Apple's biggest quarter for sales.  

Most of the revenue growth would come from higher demand for iPhone 7 and 7 Plus, as a large numbers of people will switch from phones made by rivals or upgrading their older models. In particular, Samsung stopped the production of its flagship Galaxy Note 7 smartphones. This could be an excellent opportunity for Apple even though the introduction of the competing pixel phone from Alphabet will pose threats in future years. As per analysts, Samsung debacle could boost iPhone sales by 5 million or more in the coming year (read: Is Samsung's Pain Apple's Gain? ETFs in Focus).

Further, the company is set to roll out the new models for Macbook and desktop iMacs later this week that could reverse the year-long decline in sales of its Mac computers.

However, Apple expects gross margin in the range of 38–38.5% for the first quarter of fiscal 2017, which is lower than the year-ago quarter of 39.9%. This is primarily due to limited supply of the latest iPhone models, especially 7 Plus, and lower price.

Market Impact

Following the earnings announcement, shares of AAPL dropped as much as 3% in aftermarket hours. Apple currently has a Zacks Rank #2 (Buy) and boasts a solid Industry Rank in the top 20% with a top Value and Momentum Style Score of A each, indicating some good tidings in store for the stock. Nevertheless, Growth Style Score of C points to little concern for the future growth.

ETFs in Focus

Given this, ETFs having the largest allocation to Apple are in the spotlight. Below, we have highlighted five funds that provide double-digit exposure to the tech titan and will be closely watched in the coming days (see: all the Technology ETFs here).

iShares Dow Jones US Technology ETF IYW

This ETF tracks the Dow Jones US Technology Index, giving investors exposure to 141 technology stocks. The fund has AUM of $3 billion and charges 44 bps in fees and expenses. Volume is good as it exchanges nearly 245,000 shares in hand a day. Apple occupies the top position in the basket with 16.6% of assets. More than half of the portfolio is allocated to software and services while technology hardware and equipment accounts for 27% share. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook (read: Will Tech ETFs Continue Their Rally in Q3 Earnings?).

Select Sector SPDR Technology ETF XLK

This most popular technology ETF follows the Technology Select Sector Index and has $13.3 billion in AUM. This fund trades in heavy volume of more than 9.1 million shares and charges 14 bps in fees per year from investors. In total, the fund holds about 74 securities in its basket. Of these firms, AAPL takes the top spot, making up roughly 14.1% of assets. In terms of industrial exposure, the fund is widely spread across Internet software & services, software, hardware storage & peripherals, IT services, semiconductors, and diversified telecom services that make up for a double-digit allocation each. It has a Zacks ETF Rank of 1 with a Medium risk outlook.

Vanguard Information Technology ETF VGT

This fund manages about $10.1 billion in its asset base and provides exposure to a large basket of 373 technology stocks by tracking the MSCI US Investable Market Information Technology 25/50 Index. The ETF has 0.10% in expense ratio while volume is good at nearly 367,000 shares. Here again, AAPL is the top firm with 13.1% allocation. The product is well spread out across a number of sectors with Internet software & services, hardware & storage, system software, semiconductors, and data processing & outsourced services each accounting for a double-digit allocation each. It has a Zacks ETF Rank of 1 with a Medium risk outlook (read: Technology ETF Hits New 52-Week High).

MSCI Information Technology Index ETF FTEC

This fund provides exposure to a large basket of 368 technology stocks with AUM of $483.8 million. This is done by tracking the MSCI USA IMI Information Technology Index. Here too, AAPL is the top firm with 13.5% allocation. From a sector perspective, the product is widely diversified across software, Internet software & services, IT services, technology hardware storage & peripherals, and semiconductors & semiconductor equipment with double-digit exposure each. The ETF has 0.09% in expense ratio while volume is moderate at 102,000 shares a day. It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.

iShares Edge MSCI Multifactor Technology ETF TCHF

This ETF debuted in the space six months ago and has already attracted $3 million in its asset base. It trades in a meager volume of about 200 shares. It targets companies that have the potential to outperform the broad U.S. technology sector and tracks the MSCI USA Information Technology Diversified Multiple-Factor Capped Index. Holding 43 stocks in its basket, Apple is the top firm accounting for 12.6% of the portfolio. In terms of industrial exposure, more than half of the portfolio is dominated by software & services while technology hardware & equipment, and semiconductors & semiconductor equipment round off the next three spots with a double-digit exposure each. TCHF charges 35 bps in fees per year.

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